Česká implementace Pilíře 2 – bezpečné přístavy

Czech implementation of Pillar 2 - Safe harbours

Last week, a draft Czech implementation of the Pillar 2 rules was published.

Below we provide you with selected observations on selected aspects of the safe harbours within the meaning of Article 32 of the EU Directive on ensuring a global minimum level of taxation for MNE and large-scale domestic groups – as currently proposed in the draft implementation law.

• The draft law deals with both permanent (in our understanding) and transitional safe harbours (SH).
• SH is an optional (to some extent) simplifying jurisdictional exception where, if the conditions are met, the top-up tax (TT) for a given jurisdiction and period is generally treated as zero (generally without the need to make more complex calculations under the full TT regime).
• Types of permanent SH:
  • Routine profits test (substance-based income exclusion covers simplified profits),
  • De minimis test (average of simplified revenues / profits is less than EUR 10 million / EUR 1 million),
  • Simplified ETR test (simplified ETR is at least 15 %).
• What is meant by simplified qualifying revenues/profits/covered taxes will be added to the draft law once a substantive solution is adopted at OECD level. The rules for permanent SH may yet to shift significantly.
• Transitional SH are only relevant for the transitional period, i.e. the tax year starting no later than 1 January 2027 (and ending no later than 30 June 2028).
• The types of transitional SH are similar to the permanent ones listed above, generally based on country-by-country report (CbCR) or financial statements (FS) data:
  • Routine profits test (substance-based income exclusion covers pre-tax profits as per CbCR),
  • De minimis test (revenue / profit before tax under CbCR is less than EUR 10 million / EUR 1 million),
  • Simplified ETR test (simplified ETR, i.e. adjusted income tax expense according to financial statements / profit before tax according to CbCR, is at least 15 % or 16 % or 17 % - gradually increasing ETR).
• Generally, if the transitional SH is not applied one year, then it cannot be applied the next year in that jurisdiction.
• Special modifications/limitations apply e.g. for joint ventures, transparent ultimate parent entities, investment entities etc.

The above SH are not the only simplifying exceptions - we will bring you some more next time.

If you have any questions, please contact the author of this article or the EY tax team you regularly work with.

Author:

Karel Hronek